It’s Wake Up Time

It’s Wake-up Time

By Robert J. Uek, CFA
Co-Portfolio Manager, Essex Environmental Opportunities Fund


Our overarching assumption has been that the automotive world is moving towards electrification at a pace faster than most people are expecting.  In other words, the automotive market penetration of electric vehicles will be much bigger much sooner than expected by the market. This stance is based on a number of observations, but chief among them is the belief that electric vehicles (“EVs”) perform better than cars with internal combustion engines (“ICE”), both in terms of energy efficiency and ride quality/handling, and that EVs are vastly better for the environment.  With massive improvements in battery technology and declines in cost, the day is fast approaching when unsubsidized electric vehicles with a range of more than 300 miles per charge will be on cost parity with ICE vehicles.  Further, in our view, a generational change in consumer preference for environmentally superior technology combined with government mandated restrictions or outright bans on ICE vehicles in many countries is leading to a rapidly diminishing outlook for the economic prospects of traditional auto manufacturers.  And if this isn’t enough to convince the executive teams of these traditional auto manufacturers that they are facing an existential threat from the EV trend, the stock price performance of Tesla over the past year should be a massive wake up call.  As we write this, the market capitalization of Tesla is bigger than the market caps of all of the other publicly traded traditional auto manufacturers combined.  Remarkably, Tesla now has a market cap roughly the same size as Walmart.  Whether this valuation is warranted for a company that sells only 400,000 units a year and struggles with profitability is a topic for another discussion.  Nevertheless, the share price of Telsa should scare the bejesus out of the auto industry.

So during a recent meeting with an executive from a major company that supplies materials to the lithium-ion battery industry and auto manufacturers, it was extraordinarily surprising to hear his opinion that many of the traditional auto OEMs still are not moving forward aggressively with electrification plans.  If this executive is right, the complacency of leadership at an industry facing terminal decline is staggering.

This executive’s opinion is based on both observation (a dearth of significant battery and battery material supply agreements and commitments) and his discussions with his peers at battery manufacturers, auto manufacturers and auto suppliers.  He segments the auto manufacturers into three categories:

  • those that are moving ahead aggressively towards an electric future and are committing serious capital in this effort;
  • those that are cautiously taking a “wait and see” approach to decide if they should make a real commitment to an electric future; and
  • those that are somewhere in-between – they are not fully on-board with the EV trend but are investing a little in the effort in case the world is moving to an electric future.

If the automotive world is moving towards electrification at the pace that we expect, companies in the latter two categories most likely won’t survive.  And these cohorts are comprised of the vast majority of traditional auto manufacturers.  It would appear at this time that the first category (companies that “get it” and that are “all in” on electrification) is made up of Tesla, EV startups, Chinese auto companies that have long been trying to gain auto market share outside of China, and maybe one or two of the traditional auto giants.  It is most likely that the future leaders of the auto industry will emerge from this category.

It is the same story we have seen in other industries that are facing disruptive technological threats:  executives at the entrenched companies are at first in denial of the threat, then they recognize the threat but decide to limit investment in the new technology in order to protect near term profits, then they try to jump on board the trend after it becomes glaringly obvious.  But most likely at that point it is too late.

The traditional auto companies need to be acting now to aggressively pivot to electrification, invest in battery technology and secure supply agreements of key materials.  With a few exceptions, they aren’t moving fast enough.

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